A trust is defined as an arrangement where the trust founder transfers ownership in assets to a trust to be managed by trustees for the benefit of trust beneficiaries in accordance with the trust instrument. In this way the founder transfers assets from their personal capacity into a trust. But, does this legal arrangement ensure that a spouse can ‘hide’ assets from the other spouse when it comes to divorce proceedings and determining the accrual in the respective spousal estates?
This aspect has recently come under scrutiny by the Supreme Court of Appeal (SCA), where a husband, shortly before the divorce proceedings in court created a trust with the trustee being his brother and the trust beneficiary his minor child and donated a substantial sum of money to the trust. The husband argued that the trust had been established for the maintenance of his child and accordingly the amount transferred to the trust be excluded from the calculation of accrual.
In evaluating the allegation that the trust form had been abused by transferring assets to a trust to reduce the value of their estate for accrual purposes, the SCA held that the court was not precluded from investigating such an allegation, and that in such an investigation if confirmed that the trust form had been abused the court was further empowered to pierce the trust veneer and order that the value of the assets be taken into account in calculating the accrual. The SCA confirmed that this right to pierce the veneer of the trust did not emanate from legislation, but was part of the common law powers of the court to prevent such prejudice.
Additionally, the SCA confirmed that the requirement of control of the trust assets did not need be satisfied ie. whether the husband was in control of the trust assets, which in this case it appeared legally to not be the case (he was neither trustee nor beneficiary), and that the fact that the donation was made with the apparent intent to frustrate the other spouse’s accrual claim was sufficient to justify the piercing of the trust veneer.
Lastly, the SCA established the factors which needed to be taken into account to determine whether the assets in the trust should be considered to form part of the husband’s assets:
- The timing of the creation of the trust and donation. The SCA confirmed the importance of this requirement and found that the creation of the trust so close to the divorce was a strong indication that the trust was set up to frustrate the accrual claim.
- The location of the trust. The trust was established offshore, making it more difficult and expensive for the wife to seek to recover assets from the trust, effectively trying to put the trust out of the wife’s reach.
- No consultation beforehand. Given that the parties had a history of consultation on major financial matters and given that the trust was apparently set up for the maintenance of their minor child, the absence of consultation about the creation of the trust stood at odds with the trust having a legitimate purpose.
- No immediate need for the trust. The husband had purported to create the trust for the maintenance of his minor child. This argument was confounded by the fact that he was in any case responsible for the maintenance of his child.
To summarise. Yes, our courts can pierce the veneer of a trust and include assets in the trust in the calculation of accrual at divorce. Does this mean that in all instances this will happen. Absolutely not, as this would thwart the purpose of a trust as a legitimate estate planning tool. Whether the veneer should be pierced and whether the trust form was abused to prejudice the claims of the other spouse will depend on the circumstances of each case and require careful consideration of the relevant factors applicable to the creation and use of the trust.
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